CD rates Blog

CD rates push savers over the edge

No one would bet on the endless yield drought ending any time in the near future, even after the Federal Reserve's move last week to reduce asset purchases to a mere $75 billion per month. Here are stories of savers who moved on to the greener pastures of riskier investments after the disappointment of dismal rates on certificates of deposit and the advisers who helped them.

Though there's no free lunch, for some savers a little risk is preferable to losing purchasing power to inflation as a result of low CD rates.

Holmes Osborne, CFA, principal at Osborne Global Investors:

We've had excellent luck moving CD buyers to short-term, corporate bonds -- Alcoa, Lorillard Tobacco, Case New Holland Tractor, Southwest Airlines to name a few. These bonds mature in three to five years and yield from 3 percent to 4 percent. It beats CDs, and investors are getting compensated for additional risk.

I've had several clients move from cash or CDs into bonds and other income investments such as stocks or REITs. Low interest rates have created a problem for retirees in particular who need income but can't afford to take on too much risk.

When my clients are looking to move from CDs to less secure investments, we talk about the tradeoff between safety, return and liquidity. If the money we are looking to move needs to be safe but not liquid, that may lead us toward a specific solution. If the money needs to be safe and liquid, that may lead us toward a different solution, and finally if the funds do not need to be safe and we are just looking for a higher return, that is liquid that will take us a different direction.

The key is for me to educate my client that they are reducing safety of principal in search of higher returns.

Have you taken more risk with your savings as a result of low CD rates?

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